Key Takeaways
- The US Dollar Index (DXY) reached a 2.75-month high, supported by hawkish comments from Federal Reserve officials and stronger-than-expected Chicago PMI data.
- Hawkish remarks from Fed presidents opposed immediate rate cuts, signaling a cautious approach to monetary policy.
- Despite dollar strength, a US government shutdown poses a risk to economic growth, potentially influencing future Fed decisions.
- The Euro weakened against the dollar, though mixed economic data from the Eurozone and divergence in central bank policies offered some support.
- Gold and silver prices declined, pressured by a stronger dollar, hawkish Fed sentiment, and easing trade tensions, though underlying safe-haven demand persists.
Dollar Index Reaches New Highs Amidst Hawkish Fed Stance
The US Dollar Index (DXY) experienced a notable rise on Friday, climbing by 0.27% to reach a fresh 2.75-month high. This upward movement was significantly influenced by hawkish commentary from key Federal Reserve officials. Kansas City Fed President Jeff Schmid, Dallas Fed President Lorie Logan, and Cleveland Fed President Beth Hammack all expressed reasons to oppose immediate Federal Reserve rate cuts, providing a supportive signal for the dollar.
Additionally, the dollar benefited from stronger-than-expected economic data, with the October MNI Chicago PMI exceeding forecasts. This positive economic reading contributed to the dollar’s momentum, building on carryover support from Wednesday. Fed Chair Powell’s earlier remarks, stating that a December rate cut was not a foregone conclusion, also played a role in bolstering the dollar’s strength.
However, the dollar’s gains were somewhat capped by a rally in the stock market on Friday, which reduced the demand for the dollar as a safe-haven asset. Concurrently, the ongoing US government shutdown continues to exert pressure on the dollar. The longer the shutdown persists, the greater the potential negative impact on the US economy, which could, in turn, increase the likelihood of the Fed considering interest rate reductions.
Economic Indicators and Fed Commentary
The October MNI Chicago PMI report indicated an improvement in manufacturing activity, rising by 3.2 points to 43.8, surpassing the expected figure of 42.3. This suggests a less severe contraction than anticipated.
Kansas City Fed President Jeff Schmid elaborated on his dissent, stating he voted against the Federal Reserve’s 25 basis point interest rate cut on Wednesday. His reasoning included the labor market being largely balanced, the economy demonstrating continued momentum, and inflation remaining elevated.
Dallas Fed President Lorie Logan echoed a similar sentiment, noting that she saw no immediate need to cut rates and would require clear evidence of faster disinflation or a more rapid cooling of the labor market before supporting another cut in December.
Cleveland Fed President Beth Hammack also indicated a preference for maintaining the current interest rate, emphasizing the need for ongoing restriction to help bring inflation back to the Fed’s target level.
Market Expectations for Federal Reserve Policy
The financial markets are currently pricing in a 63% probability that the Federal Open Market Committee (FOMC) will implement a 25 basis point reduction in the federal funds target range at its upcoming meeting on December 9-10. Looking further ahead, markets anticipate a total reduction of approximately 82 basis points by the end of 2026, bringing the effective federal funds rate down from the current 3.88% to around 3.06%.
On Friday, the EUR/USD pair experienced a significant decline, tumbling to a 2.75-month low and closing down by 0.33%. The strength of the US dollar was a primary driver of this weakness in the euro.
Despite the euro’s decline, some Eurozone economic data provided a measure of support. The October core CPI for the Eurozone and September retail sales in Germany both rose more than expected. However, central bank divergence continues to be a factor. The European Central Bank (ECB) is generally viewed as having concluded its interest rate-hiking cycle, while the Federal Reserve is expected to implement further rate cuts.
The Eurozone’s October CPI eased slightly to 2.1% year-over-year, meeting expectations, while the core CPI remained stable at 2.4% year-over-year, exceeding the forecast of 2.3%.
German retail sales for September showed a modest increase, rising by 0.2% month-over-month and 2.8% year-over-year, slightly outperforming expectations.
Current swap market pricing suggests a low, 4% chance of a 25 basis point rate cut by the ECB at its December 18 policy meeting.
USD/JPY and Precious Metals Performance
The USD/JPY pair saw a minor decrease on Friday, falling by 0.03%. The Japanese yen experienced modest gains, consolidating just above the 8.5-month low it had reached against the dollar the previous day.
Stronger-than-expected Japanese economic data, including September’s industrial production figures and October’s Tokyo CPI, were interpreted as hawkish for the Bank of Japan’s (BOJ) policy and provided support for the yen. However, a weaker-than-expected retail sales report for Japan in September limited the yen’s upward potential.
Japan’s September industrial production surged by 2.2% month-over-month, significantly exceeding the expected 1.5% and marking the largest monthly increase in seven months.
In contrast, Japan’s September retail sales increased by a more modest 0.3% month-over-month, falling short of the forecasted 0.8%
Tokyo’s Consumer Price Index (CPI) for October rose by 2.8% year-over-year, higher than the expected 2.4%. The core CPI for Tokyo, excluding fresh food and energy, also increased to 2.8% year-over-year, outpacing the forecast of 2.6%.
December COMEX gold futures closed Friday trading down by $19.40, or 0.48%, settling at a lower price. Similarly, December COMEX silver futures experienced a decline, closing down by $0.456, or 0.94%.
Precious metals surrendered earlier gains on Friday, settling lower for the day, with silver retreating from a one-week high. The rally in the US Dollar Index to a 2.75-month high triggered significant long liquidation in precious metals markets.
Hawkish comments from Federal Reserve officials on Friday also weighed on precious metals. The perceived opposition to further rate cuts by Fed presidents reduced the appeal of gold and silver as inflation hedges.
Furthermore, the easing of tensions in US-China trade relations has diminished the demand for precious metals as safe-haven assets.
Silver prices were particularly pressured by signs of weakness in Chinese industrial metals demand, following a weaker-than-expected China October manufacturing PMI, which contracted at the sharpest pace in six months.
Gold prices had initially moved higher on Friday, benefiting from carryover support from the previous day. This was due to reports of increased gold buying by central banks, with the World Gold Council noting a 28% quarter-over-quarter increase in central bank purchases, totaling 220 metric tons in the third quarter.
Persistent underlying safe-haven support for precious metals remains due to the ongoing US government shutdown, uncertainties surrounding US tariffs, geopolitical risks, substantial central bank gold acquisitions, and political pressures on the Federal Reserve’s independence.
Recent weaker-than-expected US economic data has bolstered the outlook for the Fed to maintain interest rates or even consider cuts, which is typically a bullish factor for precious metals.
However, since reaching record highs earlier this month, precious metals prices have faced pressure from heavy long liquidation. The recent rally in the S&P 500 to a new record high has also curtailed safe-haven demand, leading to substantial long liquidations and outflows from precious metal Exchange Traded Funds (ETFs).
Holdings in gold ETFs have decreased from their recent three-year high, and silver ETF holdings have also dropped from their 3.25-year peak.
China’s October manufacturing PMI fell by 0.8 points to 49.0, indicating a contraction and falling short of the expected 49.6, marking the steepest pace of contraction in six months.
Final Thoughts
The US dollar’s recent strength, driven by hawkish Federal Reserve sentiment and some positive US economic data, faces headwinds from the ongoing government shutdown. While markets are pricing in potential Fed rate cuts later in 2026, immediate policy remains data-dependent and subject to geopolitical and domestic economic factors.
Precious metals are navigating a complex environment, caught between supportive safe-haven demand and pressures from a stronger dollar and risk appetite in equities. Future price movements will likely depend on inflation trends, Fed policy signals, and global economic stability.